Loan rollover to IRA

[pmacduff]

Here's a new one on me as TPA. A broker called me today and is handling the rollover for a terminated participant out of one of my client's 401(k) plans. The participant is rolling to an IRA, but also has an outstanding loan balance. The broker claims that the investment company will allow the participant to roll the loan into his IRA and then continue to make payments. Obviously I have experience with this when rolling to another qualfied plan that will accept the loan, but I have never seen it done rolling to an IRA. The broker claims he just did this for someone, but with a 403(b) account.

Can anyone confirm or deny that this is possible or acceptable?

I spoke with my client's investment firm and they said that they will distribute the loan, default and issue a 1099-R. I asked if it was possible to use code "G" on the loan distribution 1099-R and they are going to check and let me know...but I first need to know if this is even allowable.

Thanks in advance....

[JanetM]

Loan are not permitted in IRA accounts. If loan balance existed at time of rollover then it would be treated as distribution immediately by IRA.

Besides a loan isn't a distribution eligible for rollover. Some brokers will say anything, had one recently telling one of my union groups that everyone has the option of taking their pension in lump sum.

[pmacduff]

Thanks Janet. I found this in a Q&A on the IRS website; I'm going to send it to the broker .....

"Can the outstanding loan balance from a retirement plan be rolled over into an IRA and the loan payments made to the IRA instead of the other plan?

IRAs (including SEP-IRAs) do not permit loans. Therefore, repaying a loan balance from one plan by transferring the loan balance and making loan payments to an IRA is not allowed. If this transaction was attempted, the loan would be treated as a distribution at the time of the attempted rollover."